CVB Financial (CVBF) in Ontario, Calif., has finally found its footing in lending.
The key for the $6.7 billion-asset company has been a decision to hire in markets such as San Diego and Orange County and areas that include agribusiness, construction lending and mortgages.
The additions have helped CVB's profitability as it seeks an elusive acquisition to further boost returns.
Lending challenges still exist. Many businesses are hesitant to borrow due to economic uncertainty and concerns over health care, regulation and taxes. Still, things are much better today than in years past, says Christopher Myers, CVB's president and chief executive.
"I'm optimistic," Myers says. "California is on the mend. We have a great market here and a growing population."
CVB largely caters to commercial clients and dairy farmers in Southern California and the state's Central Valley.
The company struggled to book loans in the aftermath of the financial crisis. From 2010 to 2012, the company's net loans fell 15%.
Momentum is slowly starting to build, fueling Myers' belief that his company is ready to play offense. Total loans rose 4% last year, to $3.4 billion, and industry observers expect more improvement given the recent additions to the company's lending ranks.
There is "definitely a positive view of loan growth going into 2014 relative to where they have been," says Gary Tenner, an analyst at D.A. Davidson. He says the turnaround largely stems from CVB's expansion into San Diego and the hiring in Orange County.
CVB also had stronger loan growth in the second half of last year, reflecting increased demand and a willingness to book more loans, says Aaron Deer, an analyst at Sandler O'Neill. "The pricing on loans got a little better and the company's jumbo residential mortgage product started to gain some traction," he says.
CVB's decision to hold onto mortgages stems from a desire to better serve commercial clients, Myers says. Those clients had been expressing frustration at the "process and the red tape" required to secure a mortgage, which banks typically package and sell off, he adds. The need to satisfy entities that buy the mortgages can influence the underwriting.
CVB's clients often have the ability to make substantial down payments and the company is able to conservatively underwrite its mortgages by including shorter durations.
Its lenders are also using adjustable rates, which should prove helpful it when interest rates start to rise. As a result, CVB is getting a higher yield compared to investing in mortgage-backed securities.
"This is a service issue," Myers says. "We felt like we could underwrite these loans conservatively, but we won't overtax people to go through a lot of the unnecessary red tape that goes along with selling off the mortgage."
CVB's bottom line has also benefited from expense control, which hasn't changed much despite recent hiring. Its efficiency ratio stood at roughly 47% in 2013. CVB benefits from having a limited brick-and-mortar operation with fewer than 50 branches, Myers says. It also has high deposit balances; the average checking account tops $100,000.
"Management is thoughtful about how they spend money," Deer says. "They don't skimp on areas like compliance but, before they go out and invest in new people or technology, they really measure what the return on those investments will be."
The one thing that has eluded CVB's management in the past year has been finding the right acquisition.
Management is interested in deals, but so far has come up empty. Myers says it has been "a bit frustrating" but CVB is determined to be "selective about the type of business and bank we want to integrate."
Pricing leverage hasn't been an issue; CVB's stock is trading at more than two times tangible book value. Rather, the issue involves about finding a bank that is the right fit.
California is also home to a number of eager consolidators, including Banc of California (BANC), Pacific Premier Bancorp (PPBI) and PacWest Bancorp (PACW). "There is no shortage of buyers in Southern California," Tenner says.
CVB is actively looking for a high-quality bank with $300 million to $3 billion of assets. The target should focus on business banking in CVB's current or adjacent markets, Myers says. CVB would also consider buying a nonbank, such as a wealth management firm.
"There are a finite number of these deals we can do," Myers says. "We want to think carefully about that."